King Fahd University of Petroleum and Minerals
College of Industrial Management
Construction Management
CEM – 520
Term paper Project of:
Build, Operate and Transfer (BOT)
Project Delivery System in Saudi
Arabia (Thesis)
Prepared for Prof. Assaf
Collected and done by:
SAMEER AL-MUBARAK
990142
December 2003
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Preface
This is a brief term paper of a thesis written and presented by "Muhammad
Jalaluddin Shah" to the deanship of graduate studies of King Fahd
University of Petroleum & Minerals, in partial fulfillment of the degree
requirements of the master of science in Construction Engineering and
Management (Decemeber 2001).
The title of the thesis is (BOT) Build, Operate and Transfer – Project
delivery system in Saudi Arabia. This term paper includes power point
presentation of the same subject. And it has been prepared, compiled and
collected by Sameer Ibrahim Al Mubarak.
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Introduction
Saudi Arabia's privatization and economic diversification efforts have gained a new
momentum with the formation of the Supreme Economic Council (SEC) in 1999.
Formation of such a high-powered economic body is a serious step toward vital economic
reforms and privatization process. Traditionally, financing of large-scale investment
projects such as infrastructure development was solely considered the responsibility of
the public sector. However, recently, a growing number of counties have started to
implement various privatization programs such as, "Build-Operate-Transfer", "BuildOperate-Own", "Build-Lease-Transfer", "Build-Own-Operate-Transfer" and "BuildTransfer-Own".
Build-Operate-Transfer (BOT) is a project delivery method in which a private entity,
usually a consortium is responsible for financing, construction, operation and
maintenance of the facility for agreed duration called concession period and at the end of
the period, transfers the ownership of the facility to the Government.
•
Keeping in tune, with the recent developments, the Saudi Government is also
encouraging he private sector participation in the development of infrastructure
facilities such as railways, airports, power plants, water supply facilities, ports etc.
The Government in an attempt to reduce it's spending is attracting private capital
in increasing volumes to overcome the financing limitations. The Saudi Arabia
government has already put forward a program to restructure communication and
electricity sectors etc.
STATEMENT OF PROBLEM
Saudi Arabia has witnessed a remarkable economic transformation. However, as the
funding for large scale investment projects are becoming increasingly scarce, there is a
growing trend of involving the private sector in the development of infrastructure
facilities such as roads, bridges, railways, airports, power plants, water treatment
facilities, etc. There are also serious problems associated with expanding the
infrastructure in such areas as electricity, education, housing and health care facilities.
In this environment, increased private sector participation will help in the realization of
large-scale infrastructure projects with minimum burden on government. Moreover, in
recent years, the high population growth rate has necessitated the construction of new
facilities as well as maintenance and rehabilitation of existing structures. "Build-OperateTransfer", "Build-Operate-Own", and "Build-Lease-Transfer", "Build-Own-OperateTransfer" and "Build-Transfer-Operate" models are popular project delivery systems
adopted globally for development of infrastructure. These models can stimulate
economic activity and create substantial foreign direct investment create opportunities for
local private sector in the kingdom and help in creating stronger private sector and jobs.
Thus, the feasibility of implementing BOT project delivery system in Saudi Arabia needs
an investigation.
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Objectives of the Research
The Objectives of the research are:
1.
2.
3.
To study the feasibility of implementing BOT delivery system in Saudi Arabia.
To identify and assess the impact of obstacles and success factors for successful
implementation of BOT delivery system in Saudi Arabia.
To identify appropriate type of construction project/markets which could be
possibly implemented through BOT procurement system.
SIGNIFICANCE OF STUDY
The study on the feasibility of implementation of Build Operate Transfer delivery system
in Saudi Arabia is timely, as it coincides with the Saudi Government desire to increase
the role of private sector. The privatization drive, which is currently underway, would
contribute to the expansion of infrastructure development relying less on the
Government's budget. The current Seventh "Five Year Development Plan" emphasizes
continued strengthening of private sector participation in infrastructure development. In
this environment, increased private sector participation in through "Build-OperateTransfer", "Build-Operate-Own", and "Build-Transfer-Own" models can stimulate
economic activity and create opportunities for the local private sector as well as attract
foreign capital and also provide employment opportunities. Moreover in Saudi Arabia, a
very limited research has been conducted in the field of BOT and privatization, and hence
this study will be directed towards understanding the issues and success factors involved
in the implementation of BOT and such a study will help in understanding the roles of
private and public sectors.
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Literature Review
Definition of BOT
The term Build-Operate-Transfer (BOT) was project delivery method, a private entity,
usually a consortium is responsible for financing, construction, operation and
maintenance of the facility for agreed duration known as Concession period and at the
end of he period, transfers the ownership of the facility to the government.
BOT as defined "the granting of a concession by the government to private promoter,
known as concessionaire, who is responsible for financing, construction, operation, and
maintenance of a facility over the concession period before finally transferring the fully
operational facility to the government at no cost." Although BOT is a new concept, it has
been widely used in Asian countries like China, Philippines, Hong Kong and Malaysia.
Most of the BOT projects are power plants, and toll roads.
Increased acceptance of BOT projects can be attributed to the following factors
•
•
•
"Rapid economic growth and urbanization coupled with trend towards
globalization of economies
Demand for better quality and service
Cost effectiveness and choice of infrastructure services are increasingly important
for international competitiveness."
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The Table shows Top Ten Private Infrastructure Investment
Projects during 1984-1995
Location
Project
Contract
Cost (US$ millions)
France/United
Kingdom
Taiwan (China)
Channel Tunnel
BOT, 55 years
19,000
Taipei Mass Rapid
BOT
17000
Transit System
Japan
Kansai International BOT
15,000
Airport
Argentina
Buenos Aires water ROT, 30 years
4,000
and sewer Services
Thailand
Telecom Asia
BTO, 25 years
4,000
communication
Network
China
Daya Bay Nuclear
BOO
3,700
Power Plant, Phase
1
Malaysia
North-South Toll
BOT, 30 years
3,400
Expressway
Mexico
Petacalco CoalBOT
3,000
fired power Plant
Thailand
Bangkok Elevated
BOT, 30 years
2,981
Road and Train
System
BOO= Build-Own-Operate; BOT=Build-Operate-Transfer; BTO=Build-Transfer-Operate
ROT= Rehabilitate-Operate-Transfer
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BOT Contractual Structure
Table shows the typical contractual structure for a BOT project (Ngee et al, 1997)
A BOT mechanism is a complex structure comprising multiple, inter-dependent
agreements among various participants. Major participants in BOT project include
government, private company called concessionaire, lenders (Banks), equity investors,
contractors, suppliers, operators and financial advisers. Typically the government grants
concession to the private sector (concessionaire). The concession is awarded through
concession agreement. The concessionaire is responsible for design, finance,
construction, and operation of the facility. The concessionaire retains he title of
ownership during the concessionary period, which is normally 10-50 years, after which
the title of ownership is transferred back to the government.
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A BOT project has the following agreements
•
•
•
•
•
•
•
Concession agreement
Loan agreement
Shareholders agreement
Construction contract
Supply contract (Equipment/Material/Fuel supply contract)
Off-take agreement
O & M agreement
Concession Agreement
The concession agreement is between the government and the concessionaire. The
concession agreement is regarded as the "heart" of a BOT project as it determines the
commercial viability and profitability.
A concession agreement includes the following:
The concession period
The construction duration
Toll/tariff structure with toll/tariff revision provisions
Rights and obligations of both parities
Government guarantees: The host government offers guarantees to the project promoters
(concessionaire) like supporting loans, guarantees of minimum operating income etc.
Loan Agreement
The loan agreement is between the lenders (i.e. Banks) and the concessionaire. The
Banks provide the much necessary debt to the concessionaire. Bank debt is the primary
source of financing for a BOT infrastructure project.
Shareholder Agreement
The shareholder agreement is between the equity investors and the concessionaire.
Construction Contract
The construction contract is between the contractor and the concessionaire. The contract
is usually let under fixed price turnkey contract.
Supply Contract (Equipment/Material)
An agreement between the supplier and the concessionaire. The supplier in a supply
contract is often government agency that supplies raw material such as coal to power
plant and oil.
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Off-take Agreement
An agreement between the government and the concessionaire to purchase minimum
quantity of services such as electricity, water at fixed price for fixed term.
Operation and Maintenance Contract (O & M Contract)
An agreement between the concession company and the operator. The operation phase
Plays a very important role in the success of BOT project as is success is tied to its
revenue generating ability. The operation phase of build-operate-transfer projects
presents the great management challenge and demands the highest level of attention.
Types of BOT
Build-Operate-Transfer (BOT) is a generic term taking different forms. The other
major types are Build Operate Own (BOO), Build Transfer Operate (BTO), Build Lease
Transfer (BLT).
Build-Operate-Transfer (BOT): The private sector (concession company) is responsible
for design, finance, construction, operation and maintenance of the facility. The title of
ownership is retained by the concession company during the concession period. The
facility is transferred to the government at the end of concession period. Example:
Channel tunnel, France and UK.
Build-Operate-Own (BOO): The private sector (concession company) is responsible for
design, finance, construction, operation and maintenance of the facility. Here the title of
the ownership remains with the concessionaire. There is no transfer of ownership to
government. Example: Taweelah A2, Abu Dhabi.
Build-Transfer-Operate (BTO): The private sector (concession company) constructs the
facility and transfer the ownership to the government. The concessionaire operates the
facility by taking a contract to operate the facility. Example: Telecom Asia
communication network, Thailand.
Build-Lease-Transfer (BLT): The private sector (concession company) constructs the
facility and leases the facility o the government. The facility will be transferred to
government at the end of concession period.
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Characteristics of BOT Project
BOT projects have unique characteristics that distinguish them from other project
delivery methods. The following are some of the their unique characteristics:
1.
2.
3.
4.
5.
6.
7.
BOT projects are financed on a project finance basis with limited recourse.
Typically in limited recourse financing, the lenders provide debt to the concession
company solely based upon expected cash flow/revenue generating capacity of
the project. Financing is provided on the merit of the revenue generating capacity
of the project rather than the assets of the concessionaire company.
A key characteristic of BOT projects is raising of finance entirely by the private
sector without the involvement of government. The private sector is fully
responsible for a design, construction, finance and operation and maintenance.
BOT projects are complex structures comprising multiple interdependent
agreements among the various participants.
BOT projects are typically large-scale infrastructure projects. Transaction costs
amount on average 5 to 10% of total project cost.
BOT projects are associated with uncertainties and high risk.
BOT projects transfer the risk to the private sector.
BOT formula can be applied to any sector of the economy. But it has been used
widely in power plant sector, transportation and telecommunications.
Advantages of BOT Projects
1.
Key advantages of privatization are as follows.
•
The private firms are more efficient, hence project or service can be
delivered at lower cost
•
2.
3.
4.
Private firms are more innovative in selection of design and operation
phases of a project or service.
The private sector invests directly in the development of infrastructure, thereby
reducing public debt, balancing the budget deficit, and reduced role of public
sector.
BOT projects create business opportunities for the local private sector, create
employment avenues as well as attract substantial foreign direct investment.
BOT projects help in facilitating transfer of technology by introducing
international contracts in the host countries.
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Disadvantages of BOT
I. Transaction costs are high, they amount to 5-10% of total project cost
2. Not suitable for smaller projects. Victorian Government of Australia has suggested that
projects with a value of less than Australian dollar $15m are unlikely to gain benefits
from BOT delivery method.
3. The success of BOT project depends upon successful raising of necessary finance.
Various costs such as cost of construction, equipment, maintenance should be committed
during the life of the project.
4. BOT projects are successful only when substantial revenues are generated during the
operation phase.
Competitive Tendering Process / Bid Evaluation Procedures
The typical evaluation and selection process in a competitive tender is shown in Figure 2.
Pre-qualification: The main aim of the request for qualification (RFQ) is to shortlist a of
competitive proposals by consortia that consists of reputable and experienced
operators and bankers (Tiong, 1997).
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The figure shows the: Selection Process in a Competitive Tender of BOT Project
Nonetheless pre-qualification would eliminate and discourage the non-serious promoters.
Critical Success Factors (CSF):
BOT projects are characterized by high risk and cost overruns. Tiong et al (1992)
identified six Critical Success Factors (CSF) that are vital for project promoters in
winning a BOT contract. These factors are:
•
•
•
•
•
•
Entrepreneurship and leadership
Right project identification
Strength of consortium
Technical solution advantage
Financial package differentiation
Differentiation in guarantees
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Risk Sharing/Management
Risk Allocation:
Risk management plays an important role in the BOT projects. Given the multiple
complex agreements between the various members of the consortium, in which each
member is interested in different stages of project, proper allocation of risk is a
prerequisite for the success of BOT project.
Types of Risk:
The major types of risk in BOT project are:
•
•
•
•
•
•
•
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Political risk
Currency and foreign exchange risk
Cost overrun risk
Delay risk
Tariff adjustment risk
Market risk
Operation risk
Force majure risk
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Case Studies of BOT Projects
The Following are the case studies (examples) that illustrate the different characteristics
and aspects of BOT project delivery method.
Each of these cases presented highlight the contractual structure employed, major
participants and their roles and responsibilities.
These are as follows:
•
•
•
•
Sydney Harbour Tunnel, Australia
Labin 'B' Power Plant, China
Taweelah A2 Project, Abu Dhabi
Tates Carin Tunnel, Hongkong
Sydney Harbour Tunnel, Australia
A joint venture of Kumagai Gumi of Japan and Transfield, a local Australian construction
company was awarded the concession by the Australian government. It was the first
BOT project and one of he largest privately funded project in Australia.
Labin 'B' Power Plant, China
The authorities of the Province of Guangxi in the People's Republic of China awarded in
1996 a consortium of Electricite de France (EDF), and GEC ALSTHOM a concession for
a period of 18 years including the construction period of 3 years.
Taweelah A2 Project, Abu Dhabi
Taweelah A2 project consists of four main contractual agreements:
•
•
•
•
Power and Water Purchase Agreement (PWPA)
Project Company Shareholders' Agreement
Shared Facilities Company Shareholders' Agreement
Land Lease Agreements
Tates Carin Tunnel, Hongkong
Tates carin tunnel project was won by Tates Carin Tunnel Company, a joint venture
between Gammon and Nishimatsu. The concession period for Tates carin tunnel project
is 30 years.
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Research Methodology
Research Plan
The study identities and assesses the impact of obstacles and success factors that affect
application of BOT delivery system in Saudi Arabia.
Phases of Research
Phase 1: Literature Review
The required information was collected from the following sources:
•
•
•
•
•
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Local business magazines, journals and newspaper articles
International journals related to Construction Engineering & Management
Publications and research reports prepared by various commercial books,
World Bank and other organizations
Internet
Published BOT contracts/conditions
Phase 2: Identification of Factors that have an impact on Application of BOT
Data regarding the following issues was collected:
•
•
•
Major attraction or positive factors affecting the application of BOT delivery
system in Saudi Arabia
Obstacles or negative factors hindering the application of BOT delivery system in
Saudi Arabia
Areas of construction project/markets where BOT project delivery system could
be implemented
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Phase 3: Assessment Of Impact Of Obstacles And Success Factors
The third phase included assessment of impact of obstacles and success factors identified
in phase 2.The assessment was determined from content analysis of documented
publications from multiple sources including:
• Local business magazines, newspapers
• Research reports
• Publications prepared by various commercial banks
• Official documents concerning the Saudi Arabian five year development plan
• Investment rules etc.
This. approach was selected over the traditional "opinion survey" for the following
reasons:
•
Lack of familiarity of potential respondents with the BOT delivery system.
•
Difficulty in formulating a questionnaire or an interview schedule to
accurately communicate the factors and their impact.
•
Very low response rate of survey studies in previous CEM research conducted
in Saudi Arabia.
The initial phase of the study was focused on identifying the factors, (both positive and
negative) which affect the application of BOT in Saudi Arabia. This was followed by
studying the evidence to assess the relevance and impact of the factors identified in phase
2. An analytical framework was developed in the form of model by a thorough
examination of success factors and obstacles. Through this examination process, specific
issues were identified that required the input of experts or decision makers. Once deemed
appropriate, the input of such individuals was solicited.
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Development of Model(s) and Guidelines / Recommendation for
Implementation of BOT
Based upon a positive outcome of phase 3 in regards to the feasibility of adopting BOT,
phase 4 will propose model(s) and associated parameters/conditions for implementing
BOT delivery system in Saudi Arabia. It will propose formal guidelines for the
implementation of BOT delivery system in Saudi Arabia. It will also identify the
appropriate type of construction projects/markets, which could be possibly implemented
through Build Operate Transfer (BOT). the Figure presents the methodology in a
flowchart form.
Literature Review
Identification of Factors
affecting BOT
Assessment of Factors
Development of model(s)
Recommendation and Guidelines
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CONCLUSION & RECOMMENDATIONS
Summary of the Study:
In Saudi Arabia, financing of large-scale investment projects such as infrastructure
development was predominantly undertaken by the Government through its budgetary
allocation. Millions of dollars have been invested for the development of modem and
efficient infrastructure. Nonetheless, rapid urbanization, industrialization and population
growth have dramatically increased the demand for the development of new and
expansion of the existing facilities. It is estimated that $250 billion will needed to be
invested to finance projects related to power, water desalination, roads, etc. in the next 10
to 20 years. Based upon 25 year long term electricity plan. about $117 billion need to be
invested in electricity alone between 1998 and 2023. Thus it is becoming clear that the
investment requirements are huge and immense and Government alone cannot bear the
burden of provision of infrastructure development. It is also widely recognized that
private sector participation will be needed for the development and expansion of power
generation, water desalination, roads, ports, airports and railways.
Currently Build Operate Transfer (BOT) is promoted as an integral part of the
privatization policy in Saudi Arabia. BOT is a project delivery method m which a private
entity, usually a consortium is responsible for financing, construction, operation and
maintenance of the facility for agreed duration called concession period and at the end of
the period, transfers the ownership of the facility to the Government. As Saudi Arabia is
gearing up for the introduction of BOT, it is very important to identify the factors, which
effect the application of BOT in Saudi Arabia. One of the major challenges is to identify
the impact of obstacles and success factor on the successful implementation of BOT
delivery system in Saudi Arabia. The objective of this research is to study the feasibility
of implementing BOT delivery system in Saudi Arabia. For this reason a critical review
of the operating environment in Saudi Arabia was analyzed by employing content
analysis.
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The major positive factors for application of BOT in Saudi
Arabia are:
• Strong government commitment
• Availability of finances from Government and commercial institutions
• Demand for electricity generation, water desalination, etc.
• New foreign investment law.
The major obstacles in Saudi Arabia for the application of BOT are:
• Lack of adequate awareness among owners and contractors regarding the BOT concept
• Lack of independent regulatory body
• Insufficient cost recovery
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Conclusions and Recommendations:
The following conclusion and recommendations can be drawn up from the study.
General Recommendations
BOT delivery method is an attractive and desirable.
The study indicated that across all the types of infrastructure projects, power
generation and water desalination appear at present to leading the push for the
application of BOT delivery method.
There are considerable opportunities for the private sector to be involved in BOT
type arrangements in transportation infrastructure projects such as railways, roads,
and airports.
In assessing the obstacles for the application of BOT in Saudi Arabia, lack of
adequate awareness among owners and contractors regarding the BOT concept
and low service fee represent significant impediment in the way of adopting BOT.
Establishment of BOT center can be the key to disseminate the knowledge and
help in the understanding the issues involved, best practices in the design and
structuring of BOT projects. An example of such a unit is the Philippines BOT
center. The BOT center in the Philippines is a pioneer and one of the most
successful in the world. Similarly a BOT center should be established with the
following objectives:
• To disseminate information and knowledge regarding the public-private
partnership practices
• To serve as the main channel between the private sector investors and
government with aim of coordinating the implementation of BOT projects.
• To pool specialized resources and specialists to provide better understanding
of fundamentals of BOT arrangements.
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To promote BOT investment opportunities to the project promoters locally
and internationally.
To gain better understanding on drafting concession agreements and other
contractual aspects of BOT.
Thus In order for the successful implementation of BOT in Saudi Arabia significant
changes to existing laws will be required. This includes the need to create independent
regulatory bodies in each of the infrastructures sectors, namely Power sector, water
sector, and transport sectors.
There is a need for dealing for legislation dealing with the implementation of BOT
projects. Existence of such legislation would provide guidelines for potential private
sector participation. The legislation should include, evaluation criteria, procurement rules
of tenders/proposal, the role of government support, sectors where BOT project are
allowed, etc.
Each infrastructure sector has unique characteristics and significant differs from other
sectors. Hence it is recommended that a more narrow approach in needed to
investigate each type of infrastructure sectors and study to determine the applicability
of BOT. For example. BOT for power generation, or BOT for water supply, BOT for
waste water treatment etc.
It would be sound to explore the role of international institutions such World Bank.
UNIDO in design and structuring of the BOT projects, providing training and
knowledge build m various legal, financial, economic aspects of BOT.
With the establishment of Supreme Commission for Tourism (SCT), airport
expansion and development is being looked as part of provision of tourist related
infrastructure considering the strategic national importance of airports, BO projects are
more acceptable compared to BOT type projects.
The private sector can play a role in expansion of existing airports, rehabilitation,
operation and maintenance of the airports.
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